When ownership and copyright are separated: Economics of non-fungible token marketplaces with secondary markets

Abstract

Creators have long strived to secure royalties for their works but with little success. In the digital realm, monetization presents an even greater challenge, as traditional digital assets frequently suffer from piracy issues, primarily due to the lack of verifiable ownership. Recently, non-fungible token (NFT), a blockchain-enabled tradable digital asset, has aroused great public attention for its potential to address this long-standing issue. Specifically, NFTs empower creators by enabling them to earn resale royalties from post-primary-sale transactions and by providing verifiable ownership that facilitates consumer trading in a secondary market. In this paper, we employ a two-stage game-theoretic model to examine this innovative business model. Here, an NFT creator makes optimal pricing and royalty rate decisions, while consumers make their purchase and resale decisions accordingly. Our study reveals that the creator inevitably reduces the selling price when a secondary market is introduced, even without imposing royalties. Moreover, contrary to conventional wisdom that NFT-enabled royalties always benefit creators, our research uncovers that the introduction of a secondary market leads to unintended revenue loss for the creator, particularly when most consumers only engage in secondary transactions. Furthermore, we find that the platform's profitability diminishes with the introduction of a secondary market, especially when most consumers are uninformed and the platform relies primarily on the primary market for commission collection. Finally, we find that the introduction of a secondary market may leave consumers worse off, despite the resale opportunities it offers. Our findings carry crucial managerial implications for platforms, creators, consumers, and policymakers.